Fraud case grows at Sino-Forest

Sino-Forest and five executives engaged in a “complex fraudulent scheme" that misled investors about the assets and revenue of the Chinese tree plantation company, Canada’s top financial regulator says.

The company’s co-founder and former chief executive, Allen Chan, and colleagues Alfred Hung, George Ho, Simon Yeung and Albert Ip were involved “in a complex fraudulent scheme to inflate the assets and revenue of Sino-Forest and made materially misleading statements in Sino-Forest’s public disclosure record", the Ontario Securities Commission said yesterday.

David Horsley, the company’s former chief financial officer, “authorised, permitted or acquiesced" in its release of misleading statements, the commission also alleged. In addition, Mr Chan committed fraud in relation to Sino-Forest’s purchase of a controlling interest in Greenheart Group, it said.

The formal allegations were released almost nine months after the commission first said Sino-Forest – based in Hong Kong and Mississauga – might have misrepresented some of its revenue and seven weeks after the company filed for bankruptcy in Canada.

A report released on June 2 by short seller Carson Block’s Muddy Waters LLC alleged the company misled investors by overstating its timber assets. Sino-Forest denied the allegations. The Muddy Waters report triggered a 74 per cent drop in Sino-Forest on the Toronto Stock Exchange, wiping out about $C3.3 billion ($3.2 billion) of market value by the time the Ontario Securities Commission suspended the shares from trading in August.

Hedge fund Paulson & Co, once Sino-Forest’s biggest shareholder, said it sold its entire stake in June after losing $C462 million on the investment. Richard Chandler, the Singapore-based investor who is now the largest Sino-Forest shareholder, said on April 2 he had appointed a team to help lead a proposed restructuring of the company.

“We applaud the OSC, with help from regulators in Hong Kong, for holding the perpetrators accountable for their actions," Mr Block said about the commission’s allegations.

Stan Neve, a Sino-Forest spokesman, declined to comment when reached by phone in New York.

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Sino-Forest chairman William Ardell said in February the company had not been able to show it controlled a purported 788,700 hectares of timber. Mr Ardell led a $C50 million, eight-month probe by Sino-Forest directors that concluded some of the allegations by Mr Block might not be disproved.

Sino-Forest did “not have sufficient proof of ownership of the majority of its standing timber assets", the OSC said. Mr Ardell, who became chairman in August after Mr Chan resigned, has not been accused of any wrongdoing.Block’s allegations increased investor scrutiny of Chinese companies trading on North American stock exchanges. The Bloomberg Chinese Reverse Mergers Index (CHINARTO), which tracks 82 Chinese companies trading on U.S. bourses, fell 62 percent last year while the Standard & Poor’s 500 Index was unchanged

Ardell didn’t immediately respond to a telephone message left at his home in Oakville, Ontario.

In one of several transactions documented in the statement, the OSC alleges Sino-Forest purported to buy Chinese standing timber in 2007 that it had purchased through a subsidiary the same year.

The “Gengma Fraud #1" resulted in an overstatement of Sino-Forest’s timber holdings in the years through 2007-2009, the OSC said.

Sino-Forest purported to sell the timber in 2010 and then offered the same assets as collateral for a bank loan in 2011. The transaction overstated the company’s revenue in the second quarter of 2010 by 52 percent, or $157.8 million, the OSC said.

Greenheart Group

In the 2010 purchase of Hong Kong-based Greenheart, an owner of timber assets in Suriname, the OSC said Chan committed fraud in relation to a “complex series of transactions."

“Chan secretly controlled companies that received over $22 million as a result of the purchase by Sino-Forest of this controlling interest," according to the regulator’s statement today.

A hearing into the allegations will be held on July 12 in Toronto, the OSC said.

Sino-Forest’s bankruptcy filing in March was part of an accord with bondholders owed $1.8 billion to either sell the company to a third party or undergo a restructuring that would give them most of the remaining assets.

Sino-Forest also said at the time it was suing Block for defamation in Ontario.

Block said in an e-mail on March 30 that the lawsuit against him is “entirely without merit" and that he stands behind the report.